Option Investor
Newsletter

Daily Newsletter, Thursday, 3/17/2016

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

In The Wake Of The Fed

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The FOMC was positive on the economy but dovish on their inflation targets, the path of rate hikes spurring the market to new highs. The lack of interest rate hike was pretty much expected, what was not so expected was the dovish tone on future rate hikes and the time line for reaching inflation targets. The news sent the dollar crashing to new lows and has affected the markets around the world.

Indices around the world ended the day mixed as the FOMC statements send ripples through the currency world. In Asia Chinese indices were up while the Japanese Nikkei closed with a loss, weakening dollar means strengthening yen which is no good for Abe-nomics and Japans shaky recovery. The same was true in Europe; indices were mixed but mostly closed lower on the day. Rising oil and gas prices were not enough to overcome the effects of a strengthening euro.

Market Statistics

Trading here at home was quiet but not mixed. Early indications from the futures market showed a slightly negative open, unaffected by positive economic data, and that held true into the opening bell. The indices opened the day with mild losses, wavered around break even for the first half hour or so, and then began a steady climb that lasted into the lunch time hour and beyond. By 1PM the market was hitting 2016 highs and extended those gains into the late afternoon. Resistance was met in the 3PM hour and capped gains, paring some of today's advance, but left the indices near the high of the day at the closing bell.

Economic Calendar

The Economy

There was quite a bit of economic data today and all of it positive. Starting off with jobless claims the initial claims figure rose by 7,000 to hit 265,000. This is slightly above expectations but nothing to be alarmed about. Claims remain near the long term low, at levels conducive to ongoing labor market health and below 300,000 for the 54th week running (according to the BLS this is the longest streak below 300K since 1973). The 4 week moving average of claims rose by 750 but also remains near the long term low. On a not adjusted basis claims fell by -4.2% versus an expected drop of -6.6% and are -8.8% below levels at this same time last year. The biggest increases in claims were in Alabama and Texas, +732 and +707, while the biggest decreases in claims were in New York and California, -17,555 and -1288.


Continuing claims gained 8,000 on top of a +2,000 upward revision to hit 2.235 million. The four week moving average of continuing claims fell by -9,250 to hit 2.243 million, both numbers remain steady relative to levels we've seen over the past few months and consistent with ongoing labor market recovery.

The total number of claims fell by -72,124 and remain consistent with historical trends and ongoing labor market recovery. The total number of claims in this week's data is 2.648 million, the lowest level since the post holiday spike and down -7.4% from last year. Based on the historical data we should start to see a dramatic drop off in this figure within the next few weeks as the spring hiring season begins to pick up.


The Philadelphia Fed Manufacturing Business Outlook Survey was also released at 8:30AM. The survey index was expected to decline by -1% but posted a surprising gain of 12.4%, reversing 7 months of declines. Within the report all the individual gauges showed gains, most advancing into expansionary territory. New Orders rose 21 points, Shipments rose 20 points, Unfilled Orders rose 11 points, Employment rose 4 points but remains just shy of 0 and the Workweek rose 19 points entering expansionary territory. Output also increased, as did forward outlook. The 6 month forward outlook rose 11.5 points to 28.8 and a 4 month high.


The JOLTs and Leading Indicators were both released at 10AM. The JOLTs report shows that the number of available jobs increased by 260,000 to 5.5 million, just short of the record high. Within the report new hires and separations both declined marginally, as did the quite rate. The quits rate fell to 2.8 million but remain elevated and at levels consistent with labor market health.


The Index of Leading Indicators rose by 0.1%, reversing two months of declines. According to Conference Board spokesperson the index has shown a decline in the rate of growth over the past few months but the outlook remains positive with little chance of downturn. The Coincident Index gained 0.1% and the Lagging Index gained 0.4%.

The Oil Index

Oil prices shot higher today on a number of factors. One is that the OPEC/Non-OPEC meeting to discuss production freezes is back on, with or without Iran. Another is the peripheral affect of yesterday's Fed meeting; the more dovish outlook has weakened the dollar and that has helped to support prices across the commodities spectrum. Yet another reason why oil prices have moved higher are new signs of slowing US production. Today WTI crossed above $40 per barrel for the first time since January 4th. While the rally in oil appears to gaining momentum there are some things to be wary of. First, supply and production still outweigh demand. Second, US shale producers have said they would be ready to go back on-line when oil prices move above $40. Third, the meeting to discuss production freezes is still little more than smoke in the wind, when it happens and when they come to an agreement I will believe it.

The Oil Index gained a little more than 2% in today's session and set a new nearly 3 month high. Today's candle turned out to be a small but bullish spinning top and is now approaching a resistance target near 1,115. This target is the 61.8% retracement of the 2009-2012 bull market in oil and has provided support/resistance in the past. The indicators are bullish and pointing higher so it looks like this level will be tested at least although there is some divergence present. Divergences suggest that resistance may hold and at worst, provide a point of reversal, but are by no means a guarantee. A break above resistance could take the index up to 1,200 in the near to short term, first target for support is near 1,050 should the index reverse at resistance.


The Gold Index

The FOMC brought the market a pot of gold this St. Patrick's Day. The lack of rate hike and dovish posture has sent the dollar to new multi-month lows and helped gold regain much of the loss seen earlier this week, jumping more than $30 yesterday afternoon. Spot prices tried to extend yesterday's gains in today's session but were not able too, holding flat throughout the day, likely on profit taking. My view, with the dollar sinking to new lows and the prospect of even 2 more rate hikes in question the bias in gold is to the upside with targets near $1285 and $1300.

The gold miners touched a new high today as rising gold prices impact earnings expectations. The Gold Miners ETF GDX moved up by about 2% in the early part of the session only to hit my resistance targets near $21.25 and reverse today's gain. Sellers stepped in at this level and drove the index back to break even. Despite the move lower the indicators are rolling over into what could become a fairly strong bullish signal; MACD is near the 0 line and about to crossover, stochastic is forming a weak bullish crossover. Should the index break above resistance next target is near $23.


In The News, Story Stocks and Earnings

The Dollar Index fell about -1.15% in today's session and set a new 5 month low. The index is being driven down by a combination of the ECB's indication of no more QE, and the FOMC indication that rate hikes are going to come at a much slower pace than first thought. Today's action took it down below the $95 level with bearish indicators and appears to be headed for next support target near $44.25. Unless data starts coming in much hotter than expected, or the ECB gets back on the QE gas pedal, the dollar could continue lower with target near $96.50 and the long term low.


Michaels Companies, a retailer of arts and crafts supplies, announced earnings before the bell. The company reported top and bottom line beats, along with positive 2016 guidance. Earnings are up 16% from the same quarter last year on a 20% increase in revenue. While full year guidance is slightly above consensus first quarter guidance is a little on the weak side. Despite this the news was seen as favorable and helped to send the stock trading higher. Shares of the stock gapped up at the open, retreat to test support and then advanced roughly 10% for the day.


Nike revealed the first ever self tying shoe today. The technology, which relies on a sensor in the heel, tightens the shoe fit and can be adjusted by buttons on the side. While a neat invention it begs the question … why? What is the point of this and how durable is the technology? Are they going to provide service when the technology breaks down? I am sure that plenty of people will rush right out to get them as soon as they are available but I doubt I will be one, at best I see this as a novelty item. Regardless, shares of the stock gained more than 2.15% and are trading near a three month high.


Lots of retailers reported earnings this week. For the most part they have reported in line with expectations, some have beat, a few were weak, but the basic tone along with ongoing recovery in the labor market and consumer are helping to support the entire sector. Today the XRT Retail SPDR gained more than 1% and reached a new 4.5 month high. The move is promising, and comes on a massive wave of bullish momentum, but declining momentum and overbought conditions give reason for caution, especially with the onset of earnings season only a few week away. Based on earnings outlook the Consumer Discretionary sector is expected to see earnings growth near 10% in the first quarter, Consumer Staples -3%, so there could be some volatility among the retail subsector.


The Indices

The indices started today on uneven footing but that quickly changed. By the end of the first hour of trading the market was in rally mode and slowly moved higher for most of the day pushing the major indices to new highs and into positive territory for the year. The biggest gainer of the day by far was the Dow Jones Transportation Average which closed with a gain near 3%. The transports made a strong move higher, breaking past resistance at 7,720, and is accompanied by bullish indicators. Both MACD and stochastic are pointing higher, consistent with a rising market, although divergence is present. Today's move looks like it will continue moving higher with upside target near 8,350.


The Dow Jones Industrial Average made the 2nd biggest move in today's session, about 0.9% at days end. The blue chips extended their move above the long term trend line and accompanied by bullish indicators. Momentum strong and moving higher so this move could continue, with next upside target near 17,750 although there may be some resistance at 17,500. The caveat is that the index has now entered a previous congestion range which may bring the bear out to play. First target for support should the index pull back is near 17,250.


The S&P 500 made the 3rd largest gain in today's session, about 0.66%. The broad market extended its move above the 2020 resistance line, after testing it for new support, and closed with a new 2.5 month high. Today's candle is medium sized, not overly strong, and shows signs of both support and possible resistance with the upper and lower shadows. The indicators are bullish and moving higher although there are some signs the move may be running out of steam, namely divergence in MACD and overbought conditions in the stochastic. Next upside target is near 2090 with a chance of resistance near the 2050 level. First target for support is now 2020 with 2000 next should the first target not hold.


The NASDAQ Composite made the smallest gain today, only 0.23%, after spending much of the session in negative territory. Today's candle is relatively small and shows sign of resistance with the upper shadow but was able to hold and move up from the 4750 level. The indicators are bullish and pointing to rising prices although, like with the other indices, there are divergences present. Next upside target is near 4900.


The market seems to like the FOMC's new stance on the rate hike time line. The dovish tone has delivered a perfect storm of positive factors that should continue to support the market into the longer term. Aside from reduced fear of rising rates the policy statement provided an upbeat outlook on the US economy and a trifecta of reasons to expect earnings outlook to begin ticking higher; the weak dollar will alleviate the impact of currency conversions on international businesses, the weak dollar is helping to support oil prices which should begin to impact energy sector earnings outlook very soon, the weak dollar is helping to support gold prices which will are going to have a positive effect on the gold sector.

I'm still bullish on the market for 2016. Earnings growth is expected to return by the second half of the year and now, more than ever, I think we can expect to see projections begin to improve. My worry is the near term and the upcoming earnings cycle scheduled to begin in less than a month. The S&P is expected to show a decline in earnings growth greater than -8%, the deepest decline since the earnings recession began, and this will not be good for the market. I hate to say it but I think we're in for another dip down to support and the divergences I mentioned in the indices may be foreshadowing this move. The good news is that another dip and test of support will be good for the longer term health of the bull market and another entry point for bullish positions. Until then I'll be riding the rally to its peak, keeping a close eye on open positions.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Contrarian Position

by Jim Brown

Click here to email Jim Brown

Editors Note:

Analysts do not like this company but shares are rising. The negativity is huge from the analyst community but shares continue to rise. Shorts are finding it difficult to follow the analysts. Even a weak retail sales report for February only caused a minor decline before the rebound continued. This is great relative strength and maybe we should tag along for the ride.


NEW DIRECTIONAL CALL PLAYS


JWN - Nordstrom -
Company Description

Nordstrom is a fashion specialty retailer offering apparel, shoes, cosmetics and accessories for men, women and children in the U.S. and Canada. They have a growing online presence as well as the Nordstrom Rack discount stores. They have a private label credit card through Nordstrom FSB, a federal savings bank and two Nordstrom Visa car offerings. As of February they operated 323 stores in 39 states in addition to Canada and Puerto Rico. The company was founded in 1901.

This is a really strange bullish recommendation since 61% of analysts (19 out of 31) have a hold rating and three have a sell rating as of February 22nd. So far in March two new analysts have initiated coverage with a sell rating. The consensus price target is $52.75 and shares closed today at $58.22.

Apparently investors are ignoring the analysts ratings because they think they have it wrong. With all of those negative ratings there are probably a lot of shorts that are cussing as each day goes by with another gain.

The analysts with buy ratings claim Nordstrom's mix of brick and mortar stores and online websites as well as their chain of discount and clearance stores will power the earnings higher in the months to come. Cowen & Company said "Going forward, we believe leveraging Nordstrom's unique multi-channel approach should benefit the top-line given that multi-channel customers spend three-to-four times more than other customers." Stifel wrote, "We do believe that Nordstrom is a market share gainer in what will likely prove to be a contracting market for apparel sales. With its best-in-class omnichannel experience, outstanding customer service and compelling merchandise assortments, both broad and deep, we believe Nordstrom can be a winner despite the more challenging environment.

In late February the company reported earnings of $1.17 and revenue of $4.19 billion that missed estimates for $1.22 and revenue of $4.22 billion. However, revenue did increase 5.2% and same store sales rose +1%. They guided for full year 2016 for revenue to rose 3.5% to 5.5% and earnings in the range of $3.10 to $3.35. Analysts were expecting $3.37. Nordstrom said the weak sales were the result of acquisition expenses, the strong dollar deterring tourist sales and the weak holiday season.

Shares fell to $46 on the news. However, that was the bottom and shares have only been down four days since those earnings. The close today at $58.22 was above strong resistance at $57.75. Since then they have declared a quarterly dividend of 37 cents payable on March 22nd to holders on March 7th.

Earnings May 12th.

I am recommending this as a breakout play with today's close over resistance at $57.75 and the next material resistance at $67. However, just to be cautious I am putting an entry trigger on the play at $58.75. I have been burned several times lately by one day wonders that spike slightly over resistance only to fall back again for a week or two.

With a JWN trade at $58.75

Buy July $62.50 call, currently $1.95, initial stop loss $55.25.


NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays




In Play Updates and Reviews

Good Day for the Bulls

by Jim Brown

Click here to email Jim Brown

Editors Note:

The dovish Fed statement setup a good day for the bulls with short covering evident in quite a few stocks. Several of our existing positions saw strong short covering with EMR the recipient of a $3.29 gain. We exited two plays for gains and were stopped out of Electronic Arts when shares fell -$2.70 intraday on no news. I will gladly trade strongly positive gains across most of the portfolio for one stop loss hit.

The Nasdaq remains the weakest index with the Nasdaq 100 actually closing with a loss for the day. The Biotech sector was still weak with another loss there dragging the Nasdaq lower. The rally in oil prices overcame the weak biotechs in the Russell 2000 with that index gaining +17 points. The strongest index was the Dow Transports with a +3% gain thanks to a huge move in FedEx after reporting strong earnings.

The 2,040 level and the 300-day average and the 2,078 level and the resistance from December are now the major hurdles to cross. The S&P closed right on that 2,040 level and that will be the critical pivot point on Friday.

With Friday a quadruple options expiration the S&P is likely to spike at the open and then sell off intraday because of the early settlement of S&P options.



Current Portfolio




Current Position Changes


HPQ - Hewlett Packard

This long call position hit our exit target at $12 to close the position.


AON - AON Plc

This long call position hit our exit target at $102.50 to close the position.


DLPH - Delphi Automotive

This long call position was triggered with a trade at $72.50.


JNJ - Johnson & Johnson

Close this long call position at the open on Friday.


EA - Electronic Arts

This long position was stopped out on the drop to $63.55 with a big drop on no news.


Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.


Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.



BULLISH Play Updates


AKAM - Akamai Technologies -
Company Description

Comments:

Minor gain but still stuck to the $55 resistance. Eventually this very tight range is going to break either up or down and when it does it could be explosive. No news.

Original Trade Description: February 26th.

Akamai Technologies provides cloud services for delivering, optimizing and securing online content for business applications on the internet. They are best known for their download delivery solutions for games, videos and audio files.

One of the things Akamai is famous for is archiving web content in centralized data centers geographically located to reduce the time and bandwidth needed to view those files. If you have a website that is visited by millions of viewers, Akamai can continuously monitor that website for changes and then replicate those changes in multiple locations so that viewers near those locations experience fast load times. For instance, a company in Kansas may have a high volume website viewed by people around the world. Akamai can replicate that website in cloud data centers in Los Angeles, New York, Miami, Dallas, London, etc, so a viewer close to one of those locations can get an immediate response time rather than having to pull the content from Kansas where bandwidth and server limitations could slow the response. If you have a million viewers a day all hitting the Kansas server from all over the world the lag time is going to be terrible.

Akamai also offers security solutions for web-hosted content thereby reducing infrastructure costs and increasing productivity.

Akamai reported Q4 earnings of 72 cents that easily beat estimates for 62 cents. Revenue of $579 million also beat estimates for $567 million. They announced a $1 billion buyback of 12.5% of their outstanding shares. CEO Thom Leighton said he was purchasing $10 million personally. The company guided to Q1 earnings of 61-64 cents and analysts were expecting 62 cents. Revenue is expected to rise +8%.

Performance and security revenues rose +16.4% to $286 million as demand for the cloud security products increased. Service and support revenues rose +17.8% to $46 million. Cash flow from operations was $218 million or 38% of revenue. Cash at the end of the quarter was $1.5 billion.

Akamai shares rallied 17% after the earnings on February 10th and reversed a four-month decline. Share barely consolidated after the spike and are continuing higher. Shares inched over resistance at $54.85 on Friday and could be poised to make a new leg higher.

Earnings are April 26th.

I am recommending an entry if AKAM traded at $55.75 and just over the Friday high of $55.55. Shares appear to be consolidating that post earnings run and the intraday ranges have been shrinking, which suggests the buyers are gaining ground.

Position 3/2/16 after an AKAM trade at $55.75

Long April $57.50 call @ $1.63, See portfolio graphic for stop loss.


AON - AON Plc - Company Description

Comments:

Nice spike to $102.58 intraday to hit our exit target at $102.50 for a nice 94% gain. No news.

Original Trade Description: March 9th.

AON offers risk management services, insurance and reinsurance brokerage, human resource consulting and outsourcing services globally with operations in more than 120 countries.

Q4 earnings of $2.09 were up +34%. Revenues of $3.28 billion narrowly missed estimates for $3.33 billion due to the impact of the strong dollar. The dollar reduced earnings by 10 cents. They repurchased 4.2 million shares for $400 million. For the ful lyear free cash flow increased 10% to a record $1.7 billion.

The CEO said in the earnings release "In a year of substantial earnings volatility driven by macroeconomic factors and industry headwinds, investments in our industry leading platform contributed to our strongest rate of organic growth in Risk Solutions since 2007."

Earnings April 29th.

I have wanted to add AON as a position since their post earnings spike in early February but the stock just kept climbing. The last three days provided some consolidation and allowed the call premiums to shrink. I believe AON will continue higher out of this consolidation period to test resistance at $102.50, which would be my exit target.

I want to see a trade at $99.50 to insure we do not enter a new play just as the market rolls over. That is closer to the preferred strike price so the option is going to cost a little more than the price listed below.

Position 3/10/16 with an AON trade at $99.50

Closed 3/17/16: Long April $100 call @ $1.70, exit $3.30, +1.60 gain


AOS - AO Smith - Company Description

Comments:

The shorts were finally forced to cover and AOS gained $1.68 for the day to break out of a two week consolidation pattern. No news.

Target $77.65 for an exit.

Original Trade Description: February 18th.

A.O. Smith manufacturers water heaters and boilers for distribution around the world. They also sell water treatment systems that are in high demand in emerging market economies.

They reported earnings last week of 90 cents that beat estimates for 85 cents. Revenue rose +2% to $639.4 million but missed estimates because of weakness in the housing sector in the USA. North American sales declined -3.9% to $413.7 million.

However, operating earnings rose +37.2% to $92.2 million because of higher pricing, higher overall demand and lower steel costs. Overall segment revenue of $1.7 billion rose +5%. This was due to higher commercial demand for boilers.

Sales in the rest of the world rose +14% to $232 million. That was powered by a 15% increase inwater heater demand, water treatment and air purification products in China. That is definitely a country that needs water treatment and air purification.

Very few companies are successful in selling to China but AO Smith is one of them.

The company bought back 329,000 shares in Q4 leaving 2.59 million to buy under the current buyback program. The company had $324 million in cash at the end of the quarter.

They guided for 2016 to earnings of $3.40-$3.55, which would be a 10% growth rate in earnings. They kept the 15% growth rate target for China in 2016.

Earnings are April 29th.

The stock bottomed on the January 19th market crash and had been moving steadily higher. The market took it lower again to retest that bottom on February 9th. Resistance is currently $70 followed by $79 from the December highs. I am recommending we enter a long call position with a trade at $70.45.

Position 2/23/16 with an AOS trade at $70.45

Long April $75 call @ $1.88. See portfolio graphic for stop loss.


CRM - SalesForce.com - Company Description

Comments:

CRM cannot free itself from resistance at $72. There could be a short squeeze breakout in the future like we saw in AOS today. No news.

Original Trade Description: March 14th.

Salesforce.com provides enterprise cloud computing solutions, with a focus on customer relationship management to various businesses and industries worldwide. They provide an entire menu of applications tailored to various industries with an emphasis on sales force automation and customer resource management.

The last six analysts ratings changes have been upgrades with four new analysts initiating coverage with a buy. Salesforce is growing quickly with revenues growing 24% in 2015 to $6.67 billion. Subscription and support revenues rose to $6.21 billion and accounted for 93% of all revenue. These fees continue from quarter to quarter and should continue growing.

Morgan Stanley said customer demand for applications software was expected to remain quite strong and Salesforce.com was positioned to make the most of this development.

The Salesforce.com CEO said sales efforts to enterprise customers were becoming more time consuming because of the greater complexity of the large enterprises but once sold they became very profitable long term assets. Once a large enterprise invests in Salesforce.com and trains its thousands of employees there is a huge inertia factor that prevents them from leaving. That subscription revenue becomes repeatable for a long time.

These longer sales and implementation cycle means that Salesforce.com has a lot of delayed revenue that it will recognize in future quarters in addition to the current revenue for those quarters. This is the equivalent of a snowball rolling down hill. Future revenue is growing even though it is not readily apparent. In Q4, the company reported deferred revenue of $4.29 billion and its unbilled deferred revenue was $7.1 billion.

For Q4 Salesforce reported earnings of 19 cents that matched estimates but revenue of $1.81 billion beat estimates for $1.79 billion. The company guided higher for 2016 and shares rose 8% on the news.

The next earnings are May 18th.

Shares moved sideways from the earnings spike for three weeks and are just now starting to move higher. Given a positive market, I think they will retest the highs in the weeks ahead.

I am recommending the May $75.00 call even though it is a little farther away from the money and slightly more expensive than the April $72.50 call. With only 32 days left in the April cycle we are reaching the point where premium decay will accelerate. If we hit a soft patch in the market the April premiums may not have time to recover. The May premium will cover the earnings on May 18th so when we exit before earnings there will still be some expectation built into the premium.

Position 3/14/16

Long May $75 call @ $2.75. See portfolio graphic for stop loss.


DLPH - Delphi Automotive - Company Description

Comments:

Delphi broke out to a three month high and triggered our entry into the position with a trade at $72.50. Wells Fargo named it one of three winners in the move to autonomous emergency braking by all the major auto makers. The other two were Mobileye (MBLY) and Autoliv (LIV).

Original Trade Description: March 5th.

Delphi manufacturers vehicles components and provides electrical and electronic, powertrain and safety technology solutions to the automotive and commercial vehicle markets worldwide. Whether you are buying a new car or repairing an old one the odds are very good you are using Delphi parts.

Vehicle sales in February were 17.54 million units on an annualized basis. As we move farther into spring and summer those numbers are going to rise sharply. Cheap gas means consumers are going to buy more new cars and upgrade their rides to the SUV category when possible.

Delphi reported earnings of $1.39 and beat consensus estimates for $1.37. Revenue of $3.88 billion rose +11% and also beat estimates for $3.79 billion. The company guided for full year earnings of $5.80-$6.10 and revenue of $16.6 to $17.0 billion.

Shares rallied after earnings and broke through resistance at $68 last week to close at $71.53. The next significant resistance is $77.25. Earnings are April 28th.

I am recommending we buy the May $75 calls at $2.40 so there will still be some earnings expectation premium in them when we exit before earnings. April options expire on the 15th so premiums will deflate significantly before we ever get to the earnings event. I am recommending an entry point at $72.50 and just over Friday's high. If the market does take profits early in the week we can lower the strike price and entry target depending on what happens to Delphi shares.

Position 3/17/16 with a DLPH trade at $72.50

Long May $75 call @ $2.50, initial stop loss $65.85.


EA - Electronic Arts - Company Description

Comments:

EA dropped -$2.70 intraday on no news to stop us out of the position at $63.55 for a -1.31 loss.

Original Trade Description: February 29th.

Electronic Arts develops, markets and distributes game software for online games, game consoles, internet connected devices, PCs, mobile phones and tablets worldwide.

Some of their major game brands are Madden NFL, The Sims, Battlefield, Dragon Age and Plants vs Zombies. In Q4 the company sold more than 13 million copies of Star Wars: Battlefront. That quantity was three months ahead of what they anticipated.

Piper Jaffray said last week that the current generation of game consoles has a long way to go to catch up with the prior generation. They view that as a positive for EA.

The current console cycle is in its third year and Piper said the uptake rate has been 40% to 50% faster than in prior cycles. However, only about 40% as many Xbox One and PS4 consoles have been shipped as the prior generation of Xbox 360 and PS3s. Sales of the older models reached 162 million units and the current generation has only sold about 60 million. Considering the newer versions have many more features the analyst believes the trade up rate will continue to grow for several years. At the end of 2015 EA had 8,400 employees.

The analyst also believes the shift towards digital delivery will also drive margins higher. Piper has an $87 price target on EA.

At the end of January EA reported earnings that beat estimates but revenue of $1.8 billion narrowly missed estimates for $1.81 billion. They raised their full year guidance to $4.52 billion and $3.04 per share. Analysts were expecting $3.10 and $4.56 billion. EA has a history of issuing very conservative guidance. They also said because they sold so many of the star Wars game in Q4 that sales estimates for Q1 were lower. Shares crashed on the news from $71 to $53. Shares rebounded quickly from that crash and closed at $64 on Monday.

Last week EA announced the sale of $600 million in notes and a $500 million stock buyback program that will be completed by the end of May. Rarely do companies announce buyback programs with only a 90-day window. This should continue to lift the shares in the weeks ahead.

EA will present at the Morgan Stanley Media conference at 6:25 PM ET on Tuesday.

I believe EA shares will recapture that $70 level if the market cooperates. I am recommending a short term April $67.50 call, currently $1.62. If the current rebound fades we will not have much at risk.

I am using an entry trigger just in case the afternoon fade today was the start of something bigger. The entry point will be $65.45 and just over the intraday high at $65.25.

Earnings may 5th.

Position 3/1/16 with EA trade at $65.45

Closed 3/17/16: Long April $67.50 call @ $1.91, exit .60, -1.31 loss.


EMR - Emerson Electric - Company Description

Comments:

Major short covering on no news sent EMR up +$3.29 and blew through resistance at $52.35. We should exit now and pocket our 118% gain but there is no overhead resistance until the $60 range. I am recommending we hold it even though there will probably be some profit taking on Friday. This is a June option and earnings are not until May 3rd so we have plenty of time. I am not going to raise the stop loss until we see where the profit taking takes us.

Original Trade Description: March 3rd.

While you may not have heard about Emerson Electric they have 110,800 employees and are involved in many different aspects of the economy. They design and manufacture products and deliver services to industrial, commercial and consumer markets worldwide. They specialize in process management valves, meters, switches, regulators and digital plant applications.

A major segment is providing infrastructure, power, uninterruptible power systems, thermal management equipment and integrated solutions for large datacenters and cloud computing installations. They handle climate control, heating and cooling, electrical control monitoring and management.

They reported earnings for Q4 of 56 cents that beat estimates for 51 cents. Revenue of $4.713 billion beat estimates for $4.642 billion. However, revenue was down -16% because of the recession in the energy sector. The CEO said, "Lower oil prices continued to apply downward pressure on oil and gas spending, particularly upstream projects, as well as power generating alternators used in upstream applications."

Shares declined sharply but began to rebound almost immediately. The company plans to spin off its network power business later this year, which will downsize revenue by about $8 billion. They are restructuring to lower costs until the energy sector recovers and are selling noncore assets to reduce complexity. Investors liked the plans that were presented.

The company also declared a 47.5 cent quarterly dividend which produced a 4% yield at the time it was announced.

Their next earnings are May 3rd.

Emerson has resistance at $50.50 and it broke through that level on Thrusday. The next material resistance would be well above in the $60 range with a speedbump at $52.50. I am recommending we buy the June $52.50 call and plan to exit well before earnings. By purchasing the June call it will still have earnings expectations in the premium when we exit before earnings.

Emerson is somewhat of a slow mover so the options are cheap thereby limiting our risk.

Position 3/4/16

Long June $52.50 call, entry $1.60, see portfolio graphic for stop loss.


HPQ - Hewlett Packard - Company Description

Comments:

HPQ blew through resistance at $12 intraday and was immediately knocked back to $11.72. That spike through $12 at 11:30 hit our exit point and the position was closed for a nice gain.

Original Trade Description: January 25th

Back in October Hewlett Packard spun off its enterprise server business into Hewlett Packard Enterprise (HPE) and the old Hewlett Packard that sells PCs and printers remained (HPQ). The problem with this spinoff is that the enterprise company is where the profits are. The PC business has been declining for years and that is why HP split the two entities.

Since the spinoff at $14.75 in October the HPQ shares have been in decline. They closed at a new low on Monday. I see no reason where HPQ should rally in the near future. PC sales are still expected to decline in 2016 only at a slower pace. There is nothing to produce excitement in the PC company.

In theory we could probably just buy a cheap put and sit on it but HPQ has earnings on February 24th. I expect those earnings to be disappointing. However, you never know if they will pull a rabbit out of the hat and announce something that powers the stock higher. This is why I am recommending a strangle rather than just a straight put play.

HPQ shares closed at $9.49 on Monday and halfway between the $9 put and $10 call. I am recommending the April strangle so we can benefit from the long-term trend if HPQ continues to decline. If earnings disappoint we could see HPQ at $5 by then.

Earnings are February 24th.

Position 1/26/16:

Closed 3/17/16: Long April $9 put @ 41 cents, exit 2 cents, -.39 loss
Closed 3/17/16: Long April $10 call @ 50 cents, exit $1.80, +1.30 gain.
Net gain 91 cents.



JNJ - Johnson & Johnson - Company Description

Comments:

After two consecutive days of selling in a bullish market I am recommending we close the JNJ position. We currently have a loss of 16 cents and I do not want it to become worse. The rally in consumer products has failed.

Original Trade Description: February 24th

JNJ is broadly diversified with more than 250 subsidiaries. If you need a Band-Aid, mouthwash, cold capsule, cancer drug or artificial joint, they make it. They spent about $10 billion on research in 2015. Seven of the 15 new drugs they brought to market since 2009 have annual sales in excess of $1 billion.

They have increased their dividend for 53 consecutive years. The yield today is about 3%. They have a rare AAA credit rating and produce more than $11 billion in free cash flow annually. At the end of 2015 they had $38.5 billion in cash.

JNJ is recession resistant because their products are not bought on a whim. If you need a Band-Aid you buy it. If you have arthritis, you buy Motrin. If you have acid indigestion you take Pepcid. If you are sick you get a prescription for their drugs. This makes them relatively safe in times of economic weakness. With worries over a potential recession in the near future this has powered their shares to a 52-week high.

I do not need to explain JNJ to everyone because we have grown up with their brands. The company was founded in 1886 and is older than anyone reading this newsletter.

The close on Wednesday at $104.94 is right at resistance and a breakthrough here should retest the historic highs at $109 where a breakout to a new high is entirely possible. They have based at the $100 level for the last two years with the exception of the flash crash last August.

Earnings are April 12th.

Position 2/25/16:

Long May $110 call @ $1.30, see portfolio graphic for stop loss.


KR - Kroger - Company Description

Comments:

Slight weakness with resistance at $38.50 holding for the last four days. No reason to exit yet. We have a July option.

Original Trade Description: March 11th.

Kroger is a retail grocery chain with $108 billion in sales in 2014. In Q3, 2015 their same store sales comps rose +5.4% without factoring in gasoline. They have recently been adding service stations to their offerings. They operate 2,774 supermarkets, 148 with in store clinics, 786 convenience stores, 1,330 fuel centers and 326 Fred Meyer jewelry stores in the USA. In all they have more than 161.3 million square feet of operated retail space. They have 37 food-processing plants, 27 dairies, 6 bakeries and 36 distribution centers.

While most people know them as a grocery store they are much more. They operate those grocery stores under many name brands, more than two dozen, as a result of the acquisition of regional chains. They also operate multi-department stores like a small Walmart or Target.

They have more than 422,000 employees and operate in 34 states. They filled 175 million prescriptions in 2014 worth over $9 billion. Kroger earned $3.223 billion in profits in 2014.

Where Kroger is kicking butt is their new organic product lines. They are significantly cheaper than Whole Foods Markets (WFM), Fresh Market (TFM) and Sprouts Farmers Markets (SFM). They are able to compete with Walmart on organics and private label brands because they own their own food processing and distribution centers. They have dozens of store brands than encompass nearly every isle in the stores from frozen pizzas, vegetables, fruit, toilet paper, snack chips and salsa to a complete customer deli in their larger stores. Their private label organic produce covers 60% of their produce department. Their Simple Truth Organic brand is now the largest natural food brand in the USA.

While Kroger has been outperforming the other grocery and fresh food stores their shares took a hit in early January when a division president, Lynn Gust, president of the Fred Meyer division retired after 45 years. He started out as a package clerk in 1970 and rose up through the ranks to be named president and then led the division to more than $10 billion in annual sales.

At the same time Credit Suisse lowered their rating on Kroger because of deflation risks. The deflation risk means prices for products are going to continue lower. However, I view that as a positive. Kroger's costs are going down but the price of their products do not have to go down in lock step. This is a profit opportunity for Kroger. The analyst also said fuel prices will eventually rise and that will take money out of consumer's pockets. Since that will happen across the board to all grocery stores it makes sense to own the one that is making money on gasoline with their 786 convenience stores regardless of the prices.

Shares declined from $43 in early January to $36 on the Feb-11th crash. This is long-term support and shares were very oversold. In a previous play we bought the dip in February and rode the stock back up to $40.35 and exited before earnings in early March.

In the March earnings Kroger reported earnings of 57 cents compared to estimates for 54 cents. Revenue rose +4% to $26.2 billion and narrowly missed estimates for $26.3 billion. Sales excluding fuel rose +7%. Same store sales rose +3.9% but that was less than the 4.0-4.5% they had predicted in January. Kroger said shifting the Super Bowl into February hurt sales for the quarter ended January 31st. Warmer weather and fewer snow storms also hurt because people stock up on food ahead of storms but shop as normal in regular weather.

The retailer said they expect earnings to rise 6-11% in 2016 to $2.19-$2.28 per share. Same store sales are expected to rise 2.5-3.5%. This is lower than 2015 because of lower inflation.

Investors were not happy with the earnings because most never look at the details and only read the one sentence headline to make their decisions. Shares declined from $40.50 to $36.50 to give us another entry point at support.

I believe Kroger will make a new high this time. Earnings are well out in the distance on June 16th and that will allow us to buy a longer dated option and give it time to mature. Kroger is a slow mover so we need time for it to grow. With support at $36 dating back to the August crash it should be a relatively safe position.

Position 3/14/16:

Long July $40 call @ $1.55, no initial stop loss


N - NetSuite - Company Description

Comments:

Still fighting resistance at $64.50 with 5 cent decline from 2 month high close. No news.

Target $68.85 for an exit.

Original Trade Description: February 19th.

NetSuite provides cloud based financials/enterprise resource planning (ERP) and omnichannel commerce suites in the U.S. and internationally. They also offer customer relationship management (CRM) and professional services automation (PSA). NetSuite OneWorld manages various companies or legal entities across multiple countries with different currencies, taxation rules and reporting requirements.

NetSuite reported adjusted earnings on January 28th of 5 cents compared to expectations for 4 cents. Revenue of $206.2 million rose +33% and beat estimates for $205 million. They reported several new accounts including Snapchat, American Express Global Business Travel and Lucky Brand to name a few. They added 616 new customers in the quarter and replaced SAP in 17 accounts. Recurring revenues rose +30% and now make up 80% of revenue. Nonrecurring revenue of $41.7 million rose +34%. They ended the quarter with $379 million in cash.

Revenue for 2016 is expected to rise 28-31% with earnings growing 80% to 100% to a range of 40-45 cents.

NetSuite was upgraded by Canaccord Genuity from hold to buy after earnings.

Not many companies are growing annual revenue by 30% and earnings by 100%. This is NOT Tableau software but it was punished for Tableau's weakness.

Earnings are April 21st.

Position 2/22/16 with a trade at $56.50

Long April $60 call @ $2.40, see portfolio graphic for stop loss


NTAP - NetApp - Company Description

Comments:

Minor gain but still stuck in the recent consolidation range. We need that short squeeze breakout.

Original Trade Description: March 11th.

NetApp provides software, systems and services to manage and store computer data worldwide. They provide data protection and data management for virtualized, shares infrastructures, cloud computing and business applications. Their hot product is a storage area network (SAN) that is all flash memory and not spinning disk drives. This delivers super high performance without the mechanical delays and hardware problems associated with disk drives.

JP Morgan is going to host a moderated "Tech Talk" at 10:AM ET on Tuesday regarding the new SolidFire all-flash array architecture. NetApp acquired SolidFire for $870 million in cash in December in order to increase penetration into the high speed storage market. SolidFire was named the "All-Flash Systems Product of the Year" by Storage Magazine in late February.

NetApp reported Q4 earnings of 70 cents that beat estimates by 2 cents. However, that was down slightly from the year ago quarter. They announced a restructuring program to reduce costs as they focus development on the new SolidFire products. NetApp said they were cutting about 1,500 of their 12,810 employees. They guided for current quarter earnings of 55-66 cents that was below estimates for 72 cents. They expect to take some significant charges on their restructuring effort.

Shares crashed on the earnigns news to $21 but the press has been kind to NetApp and share have rebounded to $27 over the last four weeks. I expect shares to continue to rise to initial resistance at $31 and possibly a new high at $35. The momentum is increasing on the NTAP rebound.

Earnings May 25th.

Position 3/14/16:

Long May $28 call @ 99 cents, no initial stop loss.


PII - Polaris Industries - Company Description

Comments:

Back to a new 3 month high but we need to move over $100 soon to stimulate new buying.

Target $105.85 for an exit.

Original Trade Description: February 25th.

Polaris makes off road vehicles, snowmobiles and motorcycles. They compete with Arctic Cat and have 8,100 employees. They are about four times larger than ACAT. They had some earnings issues from the lack of snow but their motorcycle business helped smooth out the rough spots. The company reduced guidance in December and shares declined from $96 to $68 by late January.

In Q4 sales declined -20% because of the lack of snow but also because of the oil recession. They sell a lot of off road equipment to oil field workers and they are not buying today. When oil field workers are employed they make a lot of money with starting wages in the $70-$80K range when times are good so there is a lot of extra cash floating around. Retail sales in oil regions were down -10% in Q4.

However, despite the lack of snow and a rough Q4 the company still managed to increase sales for 2015. That is impressive when snowmobile sales declined -25%. We have had some significant snowstorms in 2016 so that snowmobile inventory is probably shrinking in Q1.

Motorcycle sales rose +43% in Q4 so there is a bright side to warm weather and no snow. Sales in that division were up +74% for the full year.

Polaris is the number one off road vehicle manufacturer in the U.S. and are expecting a better 2016 with most of the growth in the second half.

Earnings are April 26th.

Shares are about to break over resistance at $89, market permitting. I am recommending the April $95 calls currently $2.00 on a breakout.

Position 2/26/16 with a PII trade at $89.50

Long April $95 call @ $2.15, see portfolio graphic for stop loss.


PKG - Packaging Corporation of America - Company Description

Comments:

Finally a short squeeze breakout from the grip of resistance at $55.

Original Trade Description: March 7th.

PKG manufactures and sells containerboard and corrugated packaging products in the US, Europe, Mexico and Canada. They produce shipping boxes, display packaging and protective packaging. They also produce packages for meat, fresh fruit, processed food, beverages and other industrial and consumer products. They also produce papers for the office environment and for specialty printing. They are the fourth largest producer of containerboard and corrugated packaging in the USA.

They reported earnings of $1.08 that beat estimates for $1.03. However, revenue of $1.39 billion missed estimates for $1.42 billion because of the strong dollar. For the full year profit was $4.47 to give them a current PE of 12.

The company announced an additional $200 million stock buyback program at the end of February. They bought back 1.7 million shares in the last 5 months of 2015 and 1.9 million shares YTD in 2016. The company said its "substantial operating cash flow" gave it an "excellent opportunity" to continue buying back its stock and return value to shareholders.

They also announced a 55-cent quarterly dividend payable April 15th to holders on March 15th which equates to a 4% yield.

Next earnings are April 25th.

After reporting earnings the shares rebounded from a sector downgrade on IP in January. PKG has rebounded from $45 to $54 and could continue higher to as much as $65 before hitting significant resistance.

With recent economic reports suggesting the economy is improving slightly this might be the right time to speculate in companies that will profit from a summer recovery.

Shares dipped slightly on Thursday after hitting as 6-week high on Wednesday. This gives us an opportunity to buy a close to the money option relatively cheaply. There is no entry trigger.

Position 3/11/16:

Long April $55 call @ $2.20, no initial stop loss.


QSR - Restaurant Brands Inc - Company Description

Comments:

Shares rebounded to a new 5 month intradayhigh but fell back into the congestion in the afternoon. No news.

Original Trade Description: March 7th.

QSR is the new name for the Burger King and Tim Hortons brands. Both have been serving customers for more than 50 years. QSR currently operates more than 19,000 restaurants in 100 countries with more than $23 billion in sales. The name change and rebranding came a year ago when Burger King bought the Tim Hortons chain.

QSR has been flying under the radar for the last year with all the news about McDonalds all day breakfast and Starbucks expanded menu. They reported earnings of 35 cents that beat estimates of 31 cents.

Same store sales rose +5.6% at Tim Hortons and 5.4% at Burger King.

Burger King sales are accelerating because of a flood of new menu items. They have Chicken Fries, which are fries dipped in fried chicken batter and fried. They have Jalapeno Chicken Fries. On February 23rd they introduced the Whopper Hot Dog. This is a foot long hotdog flame grilled and served with whatever you want on them.

Burger King received tons of free press when the new hot dog was delivered. Some food aficionados are calling the hot dog a "culinary calamity." Others called is a "disgusting disgrace" but customers are waiting in line to order them.

Franchisees claim the demand has been "overwhelming" and while only a couple weeks old they are selling over 100 a day and rising rapidly as more customers realize they are available. Americans eat more than 20 billion hotdogs a year.

Earnings are May 27th.

QSR shares are currently $37.85 and a breakout over resistance at $37.65 is in progress. I am recommending we buy the April $39 call, currently $1.10, and plan on exiting at $41 if that higher level of resistance slows the rally.

Position 3/9/16 with a QSR trade at $38.15

Long April $39 call @ $1.15. See portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)


SPY - S&P 500 ETF - ETF Description

Comments:

No daily news until we get closer to the launch point.

Original Trade Description: March 16th.

All good things must come to an end. The market appears poised to rally and produce a new leg higher. However, there is serious resistance starting at 2,075 on the S&P and continuing through 2,100. The odds are very slim that a rally will make it through that resistance ahead of the earnings cycle and assuming earnings for Q1 are as bad as the guidance we have been getting then it is even more likely the market rolls over into the "Sell in May" cycle.

Nobody can accurately pick turning points in the market on a routine basis. There are far too many things that can push and pull the indexes but at critical resistance levels we can normally anticipate at least a little reaction to those levels.

The S&P has strong resistance beginning at 2,078, which equates to $208 on the SPY. That resistance runs from 2,078 to 2,105 or roughly $211 on the SPY. I am proposing we buy puts on the SPY starting at $207 with a stop loss at $213.

The S&P may never hit those levels or it could hit them next week. The close after the Fed decision was 2,027, which means it would still have to rally 50 points to hit our initial entry point. Once it reaches that level it will have rebounded for +268 points and would be extremely overbought when it reached that 2,078 level. That makes it even more likely it will fail when it gets there.

I am going to recommend the June $200 puts. They should cost about $4 when the SPY reaches the $207 level. I want to use June because we may not reach that resistance for a couple weeks, if at all, and once we do hit that level I want to be able to profit from any sell in May decline.

This position could go for several weeks without being triggered and there is a good chance we will not get to play it with numerous analysts calling for a failure at 2,040 and 2,050 along the way. There are analysts calling for a retest of the 1,900 level this summer with some projecting significantly lower levels. If you look hard enough you can probably find someone projecting targets a couple hundred points higher or lower than the ones discussed.

Morgan Stanley's Adam Parker slashed his price target for the S&P from 2,175 to 2,050 yesterday. Most of the major banks are in the 2,050 to 2,100 range so the expectations for a major rally from here are pretty slim.

With a SPY trade at $207

Buy June $200 put, estimated premium $4.50, initial stop loss $213.

If the market continues higher I plan on adding to that position at $210.




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